Why A Powerful Russian Oligarch Was Furious With Paul Manafort

Alexander Zemlianichenko/AP

By Seth Hettena

May 7, 2018 10:42 am

Editor’s note: The following article is an excerpt from investigative journalist Seth Hettena’s new book, “Trump / Russia: A Definitive History.” This chapter delves deep into Paul Manafort’s work for Viktor Yanukovych, the Putin-aligned former President of Ukraine, and his other business dealings in the region. Hettena’s book is out tomorrow, May 8, 2018, from Melville House.

Although he was earning millions for his political consulting work in Ukraine, Paul Manafort began using his connections to make even more money. He met Dmitry Firtash, a wealthy Ukrainian businessman involved in the natural gas trade who had friends in top posts in Yanukovych’s administration, and pitched him on his grand vision for Bulgari Tower, a $1.5 billion skyscraper project in midtown Manhattan on the corner of Park Avenue and Fifty-Sixth Street. It was said to be one of the most valuable development sites in North America.

The Ukrainian natural gas tycoon had millions to invest because Gazprom, the natural gas giant controlled by the Kremlin, had given his unpronounceable company, RosUkrEnergo, a monopoly on all gas trades between Russia and Ukraine. This incredibly lucrative deal was widely viewed as a partnership with organized crime. Firtash was believed to be a front man for Semion Mogilevich. In court papers in Chicago, where Firtash was indicted in a separate international racketeering conspiracy, prosecutors described him as an “upper-echelon” associate of Russian organized crime. In 2008 Firtash agreed to commit $112 million to Manafort’s Bulgari Tower project and wired in a $25 million deposit. The deposit came from Raiffeisen Zentralbank, the Austrian bank that U.S. officials believed served as a Mogilevich front. The tower deal later collapsed.

While he was lining up investments from Firtash, Manafort proposed to Oleg Deripaska that they go into business together. The resulting company was Pericles Emerging Market Partners LP, a private equity fund in the Cayman Islands. Manafort described it to Deripaska as a vehicle to pursue investments that “leverage [our] business and political relationships” in Ukraine. Pericles sought to achieve an impressive compound annual return rate of 30 percent by investing in Ukraine, as well as other areas of interest to Deripaska — Russia, the former Soviet republics, Montenegro, and eastern and southern Europe. The offering memorandum touted Davis and Manafort’s experience with political campaigns “at the highest level.” The Russian oligarch gave Manafort a tentative commitment to invest $200 million in the fund.

Manafort tasked the management of Pericles to Rick Gates, who visited Deripaska’s representatives in Moscow and provided a “fund plan” that described various investment opportunities. Of the many ideas Gates pitched, Deripaska’s team felt only one had merit: the acquisition of Chorne More (“Black Sea”), a Ukrainian telecommunications firm.

In April of 2008, Deripaska paid nearly $19 million to fund the acquisition of Chorne More, then paid Manafort an additional $7.35 million in fees. Years later, Deripaska learned that the purchase price of Chorne More was $1.1 million less than Manafort and Gates had led him to believe. Gates and Manafort had simply pocketed the difference, laundering it through accounts in Cyprus that the two men used as “their personal piggy banks,” the oligarch said in a lawsuit.

What Gates and Manafort also withheld was the fact that Chorne More wasn’t worth nearly what Deripaska paid for it. Chorne More was valued at only $4.5 million and took in only $1.5 million in revenue. To top it off, the company was run not in a proper office, but in “a dingy, Soviet-style apartment building about six miles (10 kilometers) from the city center.”

Around the time of the Chorne More purchase in early 2008, Forbes ranked Deripaska as the ninth-wealthiest man on the planet, with a net worth estimated at $28 billion. The telecommunications company investment was a trifling fraction of his wealth, and it would hardly ruin him if the venture sank. With the advent of the global financial crisis in the fall of 2008, however, Deripaska’s businesses were hit particularly hard. Much of his wealth was wiped out and the struggling tycoon went hat in hand to the Kremlin for a $4.5 billion bailout. Putin put Deripaska in his place the following year in Pikalevo, a town that was struggling following the closure of one of Deripaska’s aluminum refineries. In a televised broadcast, Putin compared factory owners who didn’t pay workers’ wages to cockroaches, and then forced Deripaska to sign a document restarting the plant. As the oligarch walked away, Putin snapped, “Give me back my pen.”

A humbled Deripaska went looking for pennies wherever he could find them, and he instructed Manafort and Gates to liquidate Pericles and sell off Chorne More. Manafort and Gates agreed, but for the next two years, Pericles neither shuttered its doors nor sold off Chorne More. In fact, investigators later discovered that Chorne More was not owned by Pericles, but by a mysterious British company. The last Deripaska heard from Manafort was in June 2011. After that, Manafort and Gates stopped responding to Deripaska’s team. “It appears that Paul Manafort and Rick Gates have simply disappeared,” Deripaska’s lawyers wrote in a Cayman Islands petition.

Manafort hadn’t disappeared; he remained in Kiev with Yanukovych, who was still cutting his checks. As Deripaska worked to keep his empire intact, Manafort worked his sorcery on Yanukovych’s presidential campaign in Ukraine’s 2010 election. Once again it became a battle of Western and Eastern ideologies, with no clear favorite among the candidates. The administration of President Yushchenko, the man who had defeated Yanukovych in the days of the Orange Revolution, was widely seen as chaotic, with infighting taking precedence over policymaking. Yanukovych had been dismissed as prime minister after a year. His replacement was the co-leader of the Orange Revolution, Yulia Tymoshenko, a steely, blond-bunned politician dubbed “the gas princess” for the enormous fortune she amassed in the 1990s with sweetheart deals in the natural gas business.

In the first round of voting in the 2010 Ukrainian presidential election, Prime Minister Tymoshenko and Manafort’s man Viktor Yanukovych emerged as the front-runners. To prep for the second round, Tymoshenko hired AKPD, a consulting firm run by David Axelrod, Obama’s former chief strategist, to help bolster her campaign. But AKPD couldn’t navigate the complex world of Ukrainian politics like Manafort, and after the dust settled from the second round, his years of steering Yanukovych toward his goal paid off. On February 7, 2010, Yanukovych emerged as the winner and was declared Ukraine’s fourth president. Manafort was exalted in the Ukrainian press as a “mythical figure.”

Almost as soon as he was sworn in, Yanukovych embarked on a platform to rebuild Ukraine’s political alliance with Russia and counter his predecessor’s pro-Western initiatives. He bluntly quashed the long-running NATO membership debate among Ukrainian politicians. And while he publicly called for a free and democratic Ukraine, reports of press censorship proliferated, and his political opponents, including the defeated Tymoshenko, landed in jail on trumped-up charges.

Tymoshenko’s imprisonment triggered a fierce international outcry, among them a call to boycott Ukraine’s bid to host the 2012 European soccer championship. Yanukovych stressed that Tymoshenko “broke the rules” and wagged his finger at her champions. “I am disappointed by the premature conclusions of some European politicians who do not understand the depth of these issues and rush to make political pronouncements. This practice pushes me away from Europe. It pushes me away.”

The one Westerner he didn’t alienate was Paul Manafort, who continued working behind the scenes for President Yanukovych. Manafort had “walk-in” privileges that allowed him to enter the president’s office unannounced. Yanukovych placed such faith in his American advisor that his staff started using Manafort to deliver messages they really wanted the president to hear. “Paul has a whole separate shadow government structure,” Rick Gates, his right-hand man, told a group of Washington lobbyists. “In every ministry, he has a guy.”

Manafort arranged political cover in the United States for President Yanukovych. He hired two firms in Washington — Mercury Public Affairs and the Podesta Group — to lobby members of Congress on behalf of Ukraine and President Yanukovych’s interests, paying both firms $1.1 million each. When Tymoshenko was put on trial, Manafort directed his Washington lobbyists to assure Congress that it was all perfectly legal and appropriate. Manafort secretly paid $4 million to the prominent New York law firm of Skadden, Arps, Slate, Meagher & Flom for a supposedly independent report on Tymoshenko’s trial. The report found no political motivation in Tymoshenko’s prosecution. Skadden Arps’ work was led by Gregory B. Craig, a former White House counsel under President Obama. Later, a Skadden Arps attorney named Alex van der Zwaan would plead guilty to lying to prosecutors about a conversation he had with Rick Gates over the Tymoshenko report. He also admitted to deleting records of email exchanges sought by prosecutors.

Manafort was making good money with Yanukovych, very good money. The only problem was that it was dirty. It was hard to miss how deep Yanukovych’s corruption and cronyism went. Much of the funding allocated for Ukraine’s economic development went to Donbas, Yanukovych’s home region, and a majority of key governmental and economic posts were given to friends of his from that region, many of whom were clearly unqualified for their positions. That was icing on the cake compared to the staggering $70 billion taken from the Ukrainian treasury and secreted away in foreign accounts, including those of Yanukovych’s son Oleksandr, who during his father’s presidency became one of the wealthiest people in the country. The cherry on top was the presidential palace Yanukovych had built — a giant monument to corruption, complete with a private zoo and a faux galleon moored on a private lake.
Manafort had been stashing away his paychecks from Ukraine in banks registered to shell companies in Cyprus, the tiny European nation that has long served as an offshore financial center for Russian oligarchs. Manafort used his Cyprus accounts to pay for $5.4 million worth of home improvements at his house in the Hamptons, an exclusive community at the tip of New York’s Long Island. Another $1.3 million from Cyprus went to a “home automation, lighting and home entertainment company” in Florida, where Manafort had another home. Money from Cyprus also bought a $3 million brownstone in Brooklyn, a $2.85 million condo in SoHo that he rented on Airbnb, and a property in Arlington, Virginia. Special Counsel Robert Mueller would later follow this money trail to return an indictment charging Manafort in a conspiracy to launder money and evade taxes.

The beginning of the end of Manafort’s sojourn in Ukraine came in the winter of 2013, when Yanukovych broke with his American advisor and rejected a major trade deal with the European Union, opting instead for closer ties with Russia. For the second time in his career, a major protest broke out, this time in Kiev’s Euromaidan Square. Protestors amassed to demand his impeachment for plundering the country’s wealth and turning Ukraine into a police state. Tension mounted as the demonstrations, which began peacefully, went on for months. Violence broke out on February 18, 2014, in clashes between protesters and police that lasted several days. At least 82 people were killed over the next few days, including 13 policemen; more than 1,100 people were injured. In the pandemonium, President Yanukovych boarded a helicopter and, with help from Vladimir Putin, fled to Russia where he remained.

Now effectively unemployed, Manafort and Gates shuttered their Ukraine operation. Manafort faded from the scene as he dealt with his mounting personal problems back home, but his wealth and his Ukrainian connections became something of an inside joke back in Washington. Roger Stone, Manafort’s old friend and business partner, sent out an email in 2014 to a group of friends asking “Where is Paul Manafort?” The choices were:

“Was seen chauffeuring Yanukovych around Moscow.”

“Was seen loading gold bullion on an Army transport plane from a remote airstrip outside Kiev and taking off seconds
before a mob arrived at the site.”

“Is playing golf in Palm Beach.”

Seth Hettena is an award-winning journalist. He was a longtime investigative reporter for the Associated Press, where he covered numerous stories of political corruption and American war crimes. He is also the author of the critically acclaimed book, “Spoils: The Life and Times of Randy ‘Duke’ Cunningham, History’s Most Corrupt Congressman.” His second book, “Trump / Russia: A Definitive History,” from which this article is excerpted, will be out on May 8. Hettena lives with his wife and sons in San Diego, California.